ATO Interpretative Decision

ATO ID 2002/505 (Withdrawn)

Income Tax

• This ATO ID is withdrawn and replaced by ATO ID 2010/209.
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Issue

Is the taxpayer entitled to claim a deduction for legal expenses incurred in pursuing a workers compensation claim under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The legal expenses incurred in pursuing a workers compensation claim are an allowable deduction under section 8-1 of the ITAA 1997 as the workers compensation payment is an assessable revenue receipt.

Facts

The taxpayer was injured in the workplace and claimed workers compensation.

The taxpayer's claim for workers compensation was rejected and legal assistance was sought with legal expenses incurred.

The taxpayer was successful in their claim and received an assessable compensation payment for lost earnings.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:

'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.'

In determining whether a deduction for legal expenses is allowable under section 8-1 of the ITAA 1997, the nature of the expenditure must be considered (Hallstroms Pty Ltd v. Federal Commissioner of Taxation (1946) 72 CLR 634; (1946) 3 AITR 436; (1946) 8 ATD 190). The nature or character of the legal expenses follows the advantage which is sought to be gained by incurring the expenses.

If the advantage to be gained is of a capital nature then the expenses incurred in gaining the advantage will also be of a capital nature.

The fact that a capital payment is specifically brought to account as assessable income will not change the nature of the payment. An amount that is capital in nature will remain capital notwithstanding that it is specifically included in the assessable income of the taxpayer (e.g., an Eligible Termination Payment).

The legal expenses incurred by the taxpayer in order to obtain the worker's compensation payments resulted in the taxpayer gaining assessable income. Thus, there is a clear connection between the assessable income and the expense. The amount received by the taxpayer is to replace lost earnings and is therefore revenue in nature and not a capital receipt.

Accordingly, the legal expenses were incurred in gaining the taxpayer's assessable income and are deductible under section 8-1 of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1997
   section 8-1

Case References:
Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation
   (1949) 78 CLR 47;
   (1949) 56 ALR 785;
   (1949)8 ATD 431

Keywords
Compensation income
Legal expenses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  2 May 2002

ISSN: 1445-2782